mainly macro

Wednesday, 21 February 2018

A year and a half after the vote to leave, and the government has still not decided on what form of Brexit it wants. This is despite triggering Article 50, which means we will leave in about a year. If this isn't chaos in government, what is? But why is the UK government making such a mess of Brexit?

That is the question
addressed by Tony Yates in a New Statesman article.
He makes the case that all the problems we are seeing, and in
particular the fact that the government have still not yet agreed
what they want, come back to the referendum question. Because it did
not specify how we would leave, it allowed quite conflicting visions
of Brexit to unite. And it is not just a matter of working out which
of those visions wins, because the losers may well decide they would
rather stay than leave on those terms. Hence the inability, but also
the reluctance, of May to spell out exactly what our Brexit plan is.

I think there is a
lot of truth in that, but it is far from the full story. It might
have been possible to have got all those advocating Leave to sign up
to a single vision before the referendum. It might not have won, but
it could have come close to winning. But that vision would have been
based on fantasy: fantasy about the economic consequences of any
particular path, and a fantasy about how the EU would respond.

Brexiters are not
details people. They deal in visions, as Johnson’s recent speech
showed. But worse still, they are so attached to their vision that
they will not let details (like everyone being 8% poorer as a result) get in the way. A less kind way of saying this is that Brexiters are
fantasists or ideologues.

Am I being unfair?
Just look at what is now happening in relation to the Good Friday
Agreement (GFA). The GFA is now in the way of the Brexit vision, so they
are all saying the GFA has passed its usefulness. Anyone sane can see
such a statement is completely mad and utterly irresponsible. However
it also shows us something else. It was clear the moment the
government signed up to the first stage agreement that the Irish
border issue would to a considerable extent dictate the terms of any
final agreement. It has taken the Brexiters this long before they
realised this, and started attacking the GFA. They are not details
people.

You might think that
people who would allow their vision or ideology to become more
important than details like a 8% GDP loss or peace in Northern
Ireland shouldn’t be anywhere near the levers of power, and
you would be right. One of the side effects of Brexit is that because
May feels she has to have some sort of balance between Leavers and
Remainers in her cabinet, we have an even more incompetent
Conservative administration than usual. Yet more chaos.

Unfortunately, that
incompetence is shared by May herself. The number of mistakes she has
made is endless. The moment she was elected leader she should have
realised that she had to exclude the fantasists from government as
much as possible, but instead she gave them key government posts. She
drew up red lines that were impossible to negotiate. She invoked Article 50,
which instantly put the UK at a tactical disadvantage, without any
agreed plan of how to undertake the negotiations. She made all these
mistakes because she was afraid that the Brexiters would try and
depose her and the press would turn on her the moment she started being realistic. But the point at which she was elected she had the most power (over both Brexiters and the press) she would ever
have, and she didn’t use it. That is incompetence.

What this all means
is everyone is right. Tony is right: the referendum was too vague and
put the government in a difficult position. But no government
knowingly cuts UK GDP by percentage points unless it is convinced
there is some greater danger, and the EU is hardly a danger right
now. So even if the referendum had been more precise it would have
been a precise fantasy, either about the economic consequences or
what the EU would allow. As a result, Brexit was always, and remains,
an impossible project for any sane government. But even saying all
this, the government has still managed to try doing the impossible in
an extremely incompetent way.

These different reasons for chaos are all related, and all stem from the disastrous referendum vote. May is Prime Minister because of that vote. Fantasists are at the heart of government because of the vote. And if anyone is tempted, for other reasons, to get on a high horse to talk about press freedom right now, remember the main reason that disastrous vote went the way it did. Social conservatives and the left behind were sold snakeoil, and the main salesmen were the press barons of the right wing press.

Monday, 19 February 2018

I am not a housing
expert, but it seems to me that the public debate is completely
confused because it fails to make the distinction between house
prices and rents. If we are talking about the supply and demand for
housing, the price that equates those two things is rent, not house
prices.

I discussed why
here,
but let me summarise the argument. Rent reflects the cost of being
housed, of having a roof over your head. If there are less houses to
go around, rents will be higher: higher enough to make some people
share flats, live with parents or whatever. Because houses to buy can
quickly change into houses to rent, there are not really separate
markets for buying and renting, but just one big housing market.

The price of a house
is the price of an asset. The asset in this case provides a roof over
your head for as long as you own it. This means that house prices
depend on current and future rents. Crucially, however, like any
asset, the price is the discounted sum of future rents, where the
discount rate is the real rate of interest. If real interest rates
fall but future real rents stay unchanged, housing becomes a more
attractive asset, and so wealthy people will buy more houses, pushing
the price up.

Below is a chart of
the ratio of house prices to rents in the UK and France, from OECD
data.

There are large
swings, but no major trend before around 2000. (That may surprise
people, but it reflects what has happened to rents which we will come
to.) In the early years of this millenium the house price to rent
ratio increased substantially in both countries, and has stayed
higher. I have included France with the UK to suggest that there may
be some common factor influencing their similar behaviour. [1]

That common factor
is real interest rates. You can define real interest rates many
different ways: here I’m just going to be very lazy and pull data
from the World Bank.

Again ignore the
details (I have no idea about 1995) and focus on the trend. Around
2000, real interest rates started falling, and falling substantially.
As real interest rates fall, house prices rise.

This will only be
true if the housing market is liberalised so that this kind of
arbitrage works, and that there are no taxes that stop the arbitrage
happening. That was not the case in the UK before the 1980s
(mortgages were rationed when I bought my first house), which is just
one reason why you would not expect this relationship to hold over
that period. But in the last two decades, lower returns on other
assets has seen
the rise of the middle class landlord as a way of saving for
retirement.

This substantial
fall in real interest rates is a worldwide phenomenon, and it goes by
the name of secular stagnation. Why it has happened and to what
extent it is permanent is still the subject of lively debate, which
is beyond the scope of this post. The key test will be when nominal
interest rates begin to rise over the next few years: to what extent
do real interest rates rise with them. All I can say for sure is do
not rely on those who say house prices always rise over time.

Thus the rise in
house prices in the UK and France since 2000 has got little to do
with a lack of house building, a point that Ian Mulheirn has
stressed.
But what about rents, which is where we should look for any
imbalances in supply and demand. Here is some IFS data from a recent
paper
by Robert Joyce, Matthew Mitchell and Agnes Norris Keiller.

Outside London,
there has not been a rise in the proportion of income spent on rent.
Essentially, and I suspect this applies before the mid-90s, housing
costs (rents) have risen with earnings rather than prices, and at constant real interest rates that would mean house prices rising with earnings. This
represents a very reasonable return on any asset, and is why we think
buying a house is a good investment. Now you could argue that we
should build enough houses so that this proportion of income spent on
housing falls, as it has for food for example. What you cannot argue
is that building too few houses has anything to do with why houses
have suddenly become unaffordable to young people.

The situation for
rents has clearly been different in London in recent years, and
London house prices have also risen much faster than elsewhere. David
Miles and colleagues have written an interesting paper
on how house prices in cities can rise as more people work in them
but transport costs do not fall. In recent years UK governments have
been trying to reduce the subsidy for train travel, and higher rents
are a natural consequence. One way to reverse this is to invest in
new and improved transport links into cities. However I think the
main reason that house prices have recently risen in major cities in
many countries is the decline in real interest rates noted above.
(Here
is the same debate in Vancouver.)

Does secular
stagnation (low real interest rates) mean that a whole generation has
to rent rather than buy? The main problem is the deposit that first
time buyers have to find. Low real interest rates mean a mortgage is
easier to service once you have one, although low rates of nominal
earnings growth mean that it doesn't get so much easier over time as
it used to. But rising prices means rising deposits, which if parents
cannot help means saving for a long time. Banks do not want to take
the risk of lower deposits, particularly if there is a real chance
that house prices could fall. Help to Buy is about the state
taking over the risk that Banks will not take, but is that something we collectively want to do?
That is the debate we should be having in an age of secular
stagnation. Building more houses may or may not be fine, but if real
interest rates stay low it is not going to make houses affordable again for the generation that
can no longer buy a home.

[1] It is
fascinating to look at the countries that are similar to the UK and
France, and those that are not (like the US and the Netherlands, but
especially Germany). If anyone can tell me why these countries have
not seen a permanent upward shift in house prices I would love to
hear it.

Friday, 16 February 2018

Should Democrats
complain about the large deficits that Trump and the Republicans are
creating? Or is this playing into the Republican narrative that made
the stimulus in 2009 inadequate and gave us austerity from then
onwards?

The answer that
mainstream economics gives is straightforward. In a recession when
interest rates have hit their lower bound [1] you do not worry about
the deficit and you ignore those that do worry. Deficits should be
whatever size is required to enable the economy to recover. Enough
stimulus so that central banks feel they need to raise interest rates
above their lower bound. Politicians failed to follow that advice
during the last recession.

In contrast, when
the economy is not in a recession, and interest rates are perfectly
able to control aggregate demand, then deficits at a level where
government debt starts rising may well be a problem. For various
reasons, not least the chance of a recession, it is best to have
deficits at a level which very gradually reduces the ratio of
government debt to GDP, unless you have a good reason for doing
otherwise.

There are many
reasons why, outside of a recession, deficits that, if sustained,
would steadily increase the debt to GDP ratio may be bad for the
economy, but let me give the most obvious here. For a given level of
government spending, interest on debt has to come out of taxes. The
higher the debt, the higher the taxes. That is a problem because high
taxes discourage people from working, and it is also unfair from an
intergenerational point of view.

This last point is
obvious if you think about it. The current generation could abolish
taxes and pay for all spending, including any interest on debt, by
borrowing more. That cannot go on forever, so at some point taxes
have to rise again. A whole generation has avoided paying taxes, but
at the cost of future generations paying even more.

As a result, unless
there is a very good reason like a recession [2], a responsible
government will not plan to sustain a deficit over time that raises
the debt to GDP ratio. The problem though is that it is very tempting
for a government not to be responsible. The current US government,
which is essentially a plutocracy, wants above all else to cut taxes
for the very wealthy, and if they do it without at the same time
raising taxes on other people but instead by running a deficit they
think they can get away with it. Democrats have every reason to say
that is irresponsible, although of course the main thing they should
focus on is that the last people who need a tax cut are the very
rich.

Unfortunately being
responsible can seem rather dull and boring, so it may be tempting to
hype things up a bit by predicting some disaster that will come from
rising deficits. That is not a good place to go, because you are
crying wolf. Large deficits are like overeating. Do it once or twice
and you will survive. Do it every day and you will die young. The
only difference from overeating is that you do not die young, but
your children do.

So much for
mainstream economics. What about MMT, which is often characterised as
implying that deficits do not matter? That is an incorrect
characterisation: what MMT actually says is that inflation should
determine what the deficit should be. If inflation looks like staying
below target you can and should have a larger deficit, and vice
versa. The reason they say that is that they think the central bank,
in changing interest rates to control inflation, is wasting its time,
because they believe rates do not have a predictable impact on demand
and inflation. If that were true, then even mainstream economists
would agree that the deficit should be at whatever level keeps
inflation at target. The difference between MMT and the mainstream is
whether the central bank is or is not wasting its time.

In an important
sense, whichever perspective you take, thinking about stabilisation
policy or long run deficits can just muddy the waters when it comes to the Republican tax cuts. The reason
that Republicans mainly fund tax cuts for the very wealthy by
borrowing is that it appears this is not costing anyone anything. If
nobody’s taxes are going up, the argument goes, why should we mind
too much if the richer get even richer. The key point to get across
is this. There are two possibilities. The first is that if it is
possible to permanently cut some taxes forever without raising others or cutting spending, why should the tax cut
not go to those who need it rather than those who don’t. The second more likely possibility is that it is not sustainable, in which case at some
point tax paid by ordinary people will go up or spending on ordinary people will be cut to pay for tax cuts to
the very rich. Either way, ordinary people are losing out. To focus on deficits or inflation just detracts from this
basic truth.

[1] The lower bound
is either where the central bank thinks it is or the point that
interest rate cuts become an unpredictable and therefore ineffective
instrument.

[2] A natural rather
than man made disaster might be another good reason to run deficits.
Public investment on high return infrastructure is another.

Wednesday, 14 February 2018

Although the
original allegations in the Times looked weak, it turns out (from an
interview
with ex-employee Helen Evans by Channel4 News) that the leadership at
Oxfam had not been giving the issue of exploitation by a tiny
minority of its aid workers the attention it deserved. The deputy
chief executive has resigned.

The original
allegations concerned actions by some aid worker in Haiti some years
ago. Oxfam took action at the time, and the charity has put in place
various safeguards since. But nevertheless, it is important the media
holds charities to account to ensure they do all they can to avoid
this happening again.

But threatening to
cut off all government funding is the last thing you should do. The
message that sends
to other charities is to hide any similar problems they come across
in their own work, or worse still stop looking. Any responsible
minister would have known that, but perhaps they wanted to get
political points from their own side for being tough with a ‘leftie
charity’. In none of the BBC coverage I saw (this story was the
lead item on the BBC news I watched for four days running) were any
questions raised about the government’s actions.

Contrast the
behaviour of politicians and the media in relation to what is
currently happening in the NHS. Quite simply people are dying
because there are insufficient resources to cope with needs.
Thousands have had operations postponed, leaving
them in pain. Patients are lying in trolleys because there are not
enough beds. Huge numbers, more
than ever before, are having to wait for more than four hours in A&E.

The reason for all
this is not mysterious. Health has been starved of resources by this
and the previous coalition government like never
before. I have shown the Kings Fund analysis in the past. Here is World Bank data up
to 2014. The key point is that health spending as a share of GDP
needs to rise to keep up with demand, but since 2010 the government
has been shrinking the share of total output spent on health. The
downward trend it shows until 2014 has continued and is projected to
continue.

This shows neglect
on a scale that make the leadership of Oxfam’s misdeeds look
trivial. Yet where is the media scandal? The man who has been in
charge of the NHS while this has happened and is happening in front of our noses
is still in his job. The government continues to fail to provide the resources the NHS needs, while
promising to protect the NHS, and yet it has not been held to account for
killing
people and leaving them in pain by the same media that has been happy
to pursue the leadership of Oxfam. The Minister for International
Development told the leaders of Oxfam that “an organisation’s
moral leadership comes from individuals taking responsibility for
their actions”. Quite.

The government are
in denial
about what is happening, and the media allow them to get away with
it. Of course there have been countless reports about the crisis in
the NHS, but we have not seen the kind of sustained and coordinated
media focus on who is responsible that we saw with Oxfam. This is not
about sexual exploitation in another country some years ago, but
about people dying
and in pain right here right now.

And incredibly, it
is actually worse than this. The same politicians have attempted to
use immigrants as a scapegoat for what is happening, whereas in fact
immigrants provide
more resources that could be used for health spending than they take
out. Yet time and time again ministers can get away with this lie in
the broadcast media. Worse still, one part of the government is busy
preventing
doctors the NHS desperately needs from coming to work here. And
finally, I have never heard anyone in the broadcast media question
why the government is starving the NHS of resources with such
devastating effects. Its silence on the growing privatisation
of NHS services is almost total, even though the vast majority of
people do not want this.

This reminds me of
the US election, where the media spent far too much time going on
about Clinton’s emails
and far too little time on Trump’s obvious unfitness to be a POTUS.
But in this case there is no competing narrative, no two sides to
balance. The media is simply failing to hold the government to
account for allowing totally avoidable death
and pain. This is what the UK has become in just seven years. A
country that is happy to treat those who run charities as close to
criminals, but shrugs its collective shoulders while the government destroys the NHS in front of our eyes.

Monday, 12 February 2018

If you think from
the title that this post will argue that the poor showing of Labour
in the polls means it must change course on Brexit I’m afraid I
will disappoint you. Unfortunately I am not at all surprised that
Labour’s lead in the polls that it achieved after the election has
now all but disappeared. It is certainly true that for anyone who
takes an active interest in politics the performance of this
government has been as bad as you can get, but most people do not
take an active interest. Instead their view is guided by a media
environment which aims (actively or passively) to show a very
different picture. This is increasingly true as the BBC becomes
little more than a mouthpiece for the press.

I am sure Labour
could do better at handling this naturally antagonistic environment,
but to put this all at the door of Corbyn or Brexit misses the bigger
picture. The lesson of the Labour surge during the 2017 election is
that once the party gets direct access to voters they like what they
see. Once the media filter goes back on, voters see a very different
picture. This is the lesson of 2017 that hardly anyone in the media
wants to admit.

Having said all
that, it remains the case that the one issue in the news all the time
is Brexit, and Labour are failing to capitalise on the current
divisions within the Conservative party, and the consequent damage
the government is creating. Watching the Labour leadership trying not
to talk about Brexit is looking more and more like Labour under
Miliband trying not to talk about austerity. In both cases we may be
seeing triangulation (moving to the middle ground), as I set out in
detail here
and here.
As I was always careful to say, we do not know for sure that this is
what Labour are trying to do right now. They may instead by divided
over policy. This uncertainty is important, because it means that
Labour supporters who might be willing to give them the benefit of
the doubt over Brexit are also uncertain whether they should

For that reason, as
I have also emphasised, a party that triangulates has to be very
careful to always appear to lean away from their opponents side in
the direction of their supporters. In the case of Brexit, that means
appearing significantly less pro-Brexit than the government. Polls
suggest
that was achieved during the 2017 election, but that was still in a
period where the parties talked in generalities. Since then things
have inevitably become more concrete, with the issue of the moment
being the Customs Union. The position of the two parties after
transition remains different: May is committed to leaving the Customs
Union, whereas Labour say everything is on the table. However
sometimes Labour’s position looks
as much cake and eat it as their opponents.

Sometime this month
Labour will discuss
its strategy over Brexit. The danger of its current position is
clear. Theresa May is going at some point be forced to admit that we
will stay in some form of customs union with the EU because of the
Irish border issue. The only alternative is to leave with no deal, or
dump the DUP. Whichever occurs, Labour’s non-position on the
Customs Union will look bad. If she goes for a deal Labour will be
the wrong side of the government in terms of triangulation, which
will be fatal
to its support. If she goes for No Deal because of the Customs Union
Labour will be immediately asked what it would do. Deciding to stay
in the Customs Union just at the point when the issue becomes
critical will look like the political opportunism that it is.

Given that, there is
a clear advantage from coming off the fence sooner rather than later.
The benefit of declaring to be in favour of staying in the customs
union is that they will, once more, create clear distance between
their own position and the government. The Conservatives
will of course claim that in doing so Labour are no longer supporting
the ‘will of the people’, but I doubt that will resonate. People
did not vote Leave in the referendum in order to make separate trade
deals with other countries. Any voters that do desert Labour on this
issue will come back pretty quickly as May is forced to face reality.
The government’s own analysis, which Labour should use, suggests deals with non-EU countries cannot make up for the impact of leaving the Customs
Union. Above all else, it is very difficult to see why Labour would
ever want to leave the Customs Union, given that doing so would do so
much harm to its traditional electoral base.

Friday, 9 February 2018

When I read this
by Hungarian academic Tamas Dezso Ziegler, I could not help thinking
he had a point. The point, as I understand it, is that by calling
people like Trump or Farage populist, when at the same time we call
Syriza or Podemos populist, we are in danger of diminishing or
normalising the danger the former pose. He suggests this wide definition of populism

“could be useful because there is not necessarily a moral
evaluation behind it: if they would use far right demagoguery, or
fascist politics, it would show something dangerous, extreme. It
would ring the bell to us all. Populism does not do so.”

We could add that talking about “right populists” and “left
populists” allows the academic to show a kind of balance.

There seem to me to be two definitions of populism. Dani Rodrik defines populism here
as parties/politicians/movements
with

“an
anti-establishment orientation, a claim to speak for the people
against the elites, opposition to liberal economics and
globalisation, and often (but not always) a penchant for
authoritarian governance.”

The problem I have with definitions like this is that they seem to be
encompassing rather than natural. By this I mean that it includes
things that do not obviously go together, but instead are chosen so
that they encompass some list of political parties. Virtually every
candidate for Congress in the US declares that they will ‘sort out
Washington’, so appears anti-establishment and for the people
rather than elites. In contrast, authoritarian governance is
optional. What seems to be doing the work here is opposition to
liberal economics and globalisation.

It seems to me that
a quite different conceptualisation of populism is expressed
by Jan-Werner Müller. You can tell a populist by whether they claim
to represent ‘the people’, which is certainly not all the people,
but instead just the ‘real people’. The others, be they
immigrants or the 48%, just do not count, or worse still are
‘saboteurs’ trying to thwart the ‘will of the people’. And,
critically in my view, populists are prepared to overturn the
institutions of democracy if they believe they are frustrating what
they perceive as the will of the people. The populist, if you accept
Müller’s account, denies pluralism. They are naturally
authoritarian, and so are happy to tear down the elements of a
pluralist democracy. [1]

Thinking in terms of
left or right tends to get in the way here. The more appropriate axis
to thinking about this definition of populism is social liberalism
and conservatism. A social liberal, almost by definition, is not
going to attack democratic pluralism. Once we recognise that, we can
see why parties of the right that use socially conservative policies
to attract votes are particularly vulnerable to morphing into (or
being taken over by) populists in the Müller sense. Indeed this is a
point he himself makes, as I quote here.

It seems to me that Brexit can illustrate
both types of populism. The definition of populism based on
anti-globalisation might describe quite well the average Leave voter.
The Leave voter tends to be against immigration, and as a result be prepared to roll back globalisation, and this often goes with a
belief that the elite or establishment no longer listens to them. In
contrast some of the prominent Brexiters, and certainly the
newspapers that swung the referendum vote, are populists in Müller’s
sense. They are quite happy to talk about the will of the people, and
take away power from judges and parliament to ensure the will of the
people as they see it prevails.

This is why I have
considerable sympathy with the Hungarian academic who I quoted at the
start of this post. Populists in the anti-globalisation sense may be
a problem, depending on your view of globalisation and liberal
economics, but they are not really dangerous for democracy. Populists
of the kind Müller describes are, as our history tells us.

In the US, we are
not just talking about Trump, but most of the Republican party: a
party that appears to go to any length to preserve
its gerrymandering of voting districts. In Hungary and Poland we have
seen many attacks on pluralistic democracy justified by nationalism
and racism. Both, like Russia or the far right in the US, are happy
to scapegoat
someone who happens to be a wealthy Jew as an enemy of the people for
the crime of standing up for liberalism. That certain UK
newspapers find common cause with these authoritarian regimes and the
far right in the US by scapegoating the same wealthy Jew on their
front pages should be a wake-up call that these newspapers are no
longer part of a pluralist democracy but have become instead its enemy.

[1] Tear down rather
than reform. Of course when reform becomes destroy has to be judged,
but in most cases that is not very difficult.

Thursday, 8 February 2018

I last talked
about this question from the British Social Attitudes survey in 2014.
Here is the latest version of this longstanding survey question
(source and exact question here).

A point I made in
the last post was that the percentage of people wanting lower taxes
and less spending has always been less than 10%. If you believe the
survey, and I see no reason not to, there has since 1983 been no
public appetite for reducing government spending in order to cut
taxes.

All the action over
time is between those who want things to stay as they are, and those
who want higher spending and taxes. As public spending has been cut
in recent years, so the number of people wanting more spending and
higher taxes has increased. However that proportion is still not up
to the level it was in the 1990s.

Does this survey
suggest that half the population want a larger state, and hardly
anyone wants a smaller state? That depends on what you mean by the
state. The question actually asks about spending on “health,
education and social benefits”, so it seems reasonable that this is
what people are responding to. They are taking as given that the
government in the UK provides these things, and are simply expressing
their view about whether they want more of these goods and are
prepared to pay for them. The question does not ask about whether
these goods should be produced by the state or by private contractors
working for the state.

When the public are
asked about who should own and run various activities, there is clear
support for more rather than less public involvement. (Chart source.)

These numbers are
from last year, so the collapse of Carillion and the problems with
the East Coast rail line are likely to push public opinion even
further away from the privatisation ideal. Note that only about 10%
want privatisation of the NHS, which has continued rapidly under this
government. A government that reduces government spending and taxes,
and pushes privatisation of the NHS, seems like a government of the
few and not the many.

I remember being
told how nervous the last Labour government was when they decided to raise
NIC rates to fund an increase in NHS spending. They had committed to
not raising the basic rate of income tax in order (they thought) to
be able to win elections. Given the data above, you might wonder why.
But then I remembered how the Labour PLP had decided that they had
lost the 2015 election by being too left wing, again without any real
evidence. Perhaps the lesson of these two poll results is that the
gap between what people actually want and the received wisdom of
the Westminster bubble is very large.